Lesson 2 of 9 · All lessons in this module
- Intrinsic value, mispricing and the three model familiesVideo lesson
- Dividends, splits, buybacks and the payment timelineVideo lesson
- Present value models: DDM and FCFEVideo lesson
- Preferred stock and the Gordon growth modelVideo lesson
- Multistage dividend discount modelsVideo lesson
- Price multiples and the method of comparablesVideo lesson
- Integrated cases: why multiples differ, the justified P/E and comparables
- Enterprise value multiples, asset-based valuation and choosing a modelVideo lesson
- Integrated cases: growth from dividend history, enterprise value and reconciling models
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Lesson 2 of 9 · 12 min
Dividends, splits, buybacks and the payment timeline
Only cash distributions change what shareholders receive: stock dividends and splits just cut the same pie into more slices, a buyback is equivalent to a cash dividend, and a share stops carrying the dividend on its ex-date.
In short
- Regular cash dividends are paid at known intervals; extra (special) dividends are one-offs or top-ups.
- Stock dividends, stock splits and reverse stock splits change the share count and price per share but not the value of the company or anyone's ownership share.
- A share repurchase is an alternative to a cash dividend and, all else equal, has the same effect on shareholder wealth.
- Chronology: declaration date → ex-dividend date → holder-of-record date → payment date.
- On the ex-dividend date the share price falls by roughly the dividend, because new buyers no longer get it.
Cash dividends
Equity investors earn two things: the cash dividends received while they hold the shares, and the change in price over the holding period. A dividend is a distribution to shareholders in proportion to the shares they own; a cash dividend is one paid in cash.
Regular cash dividends are paid on a known schedule: typically quarterly in the United States and Canada, semiannually in Europe and Japan, and annually in some other markets such as China. An extra or special dividend is either paid by a company with no regular schedule or added on top of the regular dividend. Cyclical companies and companies going through restructuring tend to use them.
Dividends are not a legal obligation. The board of directors must declare (authorize) them, and in some jurisdictions shareholders must approve them too. A liquidating dividend is different again: it returns capital rather than paying out earnings, for example when a company winds up or sells part of its business and passes on the proceeds.
Stock dividends, splits and reverse splits
A stock dividend (also called a bonus issue) pays shareholders in new shares instead of cash, typically 2% to 10% of the shares outstanding. The company's equity is the same pie cut into more slices, and every holder keeps the same percentage. So a stock dividend has no effect on value and is not relevant for valuation.
A stock split raises the number of shares and lowers the price per share in proportion. In a three-for-one split each old share becomes three new ones, and the price falls to about one-third. A reverse stock split does the opposite: in a one-for-five reverse split every five old shares become one new share, and the price rises about fivefold.
Neither has any economic effect on the company or its shareholders. A holder's total value, and percentage ownership, are unchanged.
| Action | Before | After | Value of holding |
|---|---|---|---|
| 3-for-1 split | 600 shares at 45.00 | 1,800 shares at 15.00 | 27,000 → 27,000 |
| 1-for-4 reverse split | 2,000 shares at 1.20 | 500 shares at 4.80 | 2,400 → 2,400 |
| 5% stock dividend | 1,000 shares at 21.00 | 1,050 shares at 20.00 | 21,000 → 21,000 |
The dividend payment chronology
Once the board votes to pay a regular dividend, four dates follow. The declaration date is when the company announces the dividend and its amount.
The ex-dividend date (ex-date) is the first day the share trades without the right to the upcoming dividend. Anyone who buys on or after this date does not receive it.
The holder-of-record date (also record date, owner-of-record date or date of book closure) usually falls one or two business days after the ex-date. Shareholders on the company's books on this date receive the dividend. The gap between ex-date and record date exists because trades take time to settle; it depends on the settlement cycle.
The payment date (or payable date) is when the company actually pays the cash. For example, Lindqvist AB might declare a SEK 0.90 dividend on 14 March, with an ex-date of 22 April, a record date of 23 April and payment on 15 May.
The price drop on the ex-date
Because buyers on the ex-date no longer receive the dividend, the share is worth less to them by about the dividend amount. All else equal, the price falls by the dividend when trading opens on the ex-date.
If Lindqvist closes at SEK 48.30 the day before its ex-date and the dividend is SEK 0.90, expect it to open near SEK 47.40. Shareholders lose nothing: whoever holds the shares at the close before the ex-date keeps the right to the 0.90, which makes up for the lower price.
Worked examples
Example 1 Split and reverse split
An investor owns 400 shares of a CHF stock priced at CHF 90.00. (a) What does she hold after a three-for-one split? (b) Another holding of 2,500 shares at CHF 0.80 undergoes a one-for-five reverse split. What does she hold then?
Example 2 Dividend versus buyback
A company has 10 million shares at EUR 50.00 and EUR 20 million of surplus cash. Compare a holder's wealth per share under (a) a cash dividend and (b) a buyback at the market price.
Example 3 Who gets the dividend?
Lindqvist AB declares SEK 0.90 with an ex-date of 22 April, record date 23 April and payment on 15 May. Anna buys on 21 April; Bo buys on 22 April. Who receives the dividend, and where would the price open on 22 April if it closed at SEK 48.30 on 21 April?
On the exam
Expect definitions (which actions change wealth, which do not), the order of the four dates, the meaning of the ex-date, and simple split arithmetic.
- Thinking a stock dividend or split creates value: ownership percentages and total value are unchanged.
- Confusing the ex-date with the record date: the ex-date comes first and is the buyer's cut-off.
- Assuming a buyer on the ex-dividend date receives the dividend.
- Treating a share repurchase like a split: a buyback distributes cash, just like a dividend.
Check yourself
Q1An investor who buys a share on its ex-dividend date most likely:
Q2An investor holds 400 shares priced at CHF 90. After a three-for-one stock split, all else equal, she most likely holds:
Q3A share trades at EUR 0.80 before a one-for-five reverse stock split. All else equal, the price after the reverse split is closest to:
Q4All else equal, which action has the same effect on shareholder wealth as a cash dividend of equal total value?
Q5Which sequence of dividend dates is correct?
Q6A share closes at GBP 62.40 on the day before its ex-dividend date. The declared dividend is GBP 1.10. All else equal, the share will most likely open on the ex-date at about:
Answer the 6 questions: +10 XP for each one you get right first time.
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